“Can a people tax themselves into prosperity? Can a man stand in a bucket and lift himself up by the handle?”
– Winston Churchill
September 5, 2024 – The market remains nervy. We looked at one reason why yesterday – the high concentration in tech stocks, including Nvidia.
In an effort to stymie selling inertia, Nvidia got ahead of the Department of Justice’s antitrust suit saying they hadn’t been served a subpoena and were cooperating with the investigation.
You say potato, we say patatoe.
Truth is, the lawyers at the DOJ can’t help themselves. Nvidia sells a product, semiconductors, that big tech wants. God forbid they sell them void of regulation. How nice of the government to spend millions of dollars of taxpayer money investigating a successful enterprise, right?
To our knowledge, Nvidia hasn’t tried to keep market share away from, say, Advanced Micro Devices, or any of the other dozens of similar companies designing and manufacturing semiconductor chips. Fact is, the firm makes a slightly better digital mousetrap for the AI crowd.
And customers want more. For now.
The real fear in the market is that big tech will not keep wanting more. Yesterday also revealed that Nvidia accounts for 40% of hardware spending at Microsoft and Meta. What if that 40% becomes 30%?
Weirdly, that may be a fundamental “dot” to connect from the broad market to the economy today… as the election really get underway and monopolizes our time with puffery.
Markets are trying to process a daily dose of policy and tax proposals from two similar campaigns pining for votes.
But thus far there’s not a lot to go on. In a blind policy “taste test” you could barely tell the candidates apart.
Donald Trump has proposed exempting taxes on tips. Kamala Harris then proposed the same. Trump wants to expand tax exemptions for kids to $5,000… Harris wants $6,00. Trump wants to cut taxes. Harris wants to increase them, but raise the standard deductions.
Harris proposed yesterday to raise capital gains from 24% to 28% on those bringing home more than $1 million. Shocker. But still way shy of the 39% Biden was advocating… until his party advocated he take stand down and take an 18 day vacation.
Trump has promised the federal government will pay for families’ who are seeking IVF treatments while trying to have kids. How will he pay for it? Doesn’t matter.
Historically speaking, none of these ideas matter.
Today’s policy proposals and campaign stunts are for TikTok and cable news junkies. This is a “vibe” election after all.
Our only real forecast now is we won’t know who that will be until long after November 5 – election day. The stage is set. The election is already destined for the courts… and a constitutional crisis.
What either candidate can and will do when they finally get in office is anyone’s guess.
Below, our financial market analyst Andrew Packer explores the presidential habit of sneaking big policy changes “after” the election (or court decision) determines who’s going to take photo ops from the oval office the next four years. Enjoy ~~ Addison
It Starts at the Top, But It Never Ends
Andrew Packer, Grey Swan Investment Fraternity
It’s February, 1898…
The U.S.S. Maine had just been sunk in Havana harbor. America is on the brink of war with Spain’s dying empire.
Over the course of a few months, America would join European imperial powers.
They would kick the Spanish out of Cuba, with some help from Teddy Roosevelt’s Rough Riders. And by winning a naval battle far in the Pacific, the United States would acquire the Philippines.
But there’s a problem. Empire is expensive. That’s why the Spanish empire was already teetering on the brink of bankruptcy.
And fighting another empire? It takes a lot of working capital. And the United States wasn’t yet set up to finance its sudden empire…
It was the days after the Civil-War Era income tax had been declared unconstitutional, and touching tariffs would hurt the growth of the economy.
A new tax was needed to balance the budget resulting from the breakout of war with the Spanish Empire. Turning an army of 20,000 to 200,000 takes a bit of money, after all…
And thus, the Telephone Tax, a.k.a. the Federal telephone excise tax, was born.
But when the war ended and the need for extra revenue disappeared, the tax was first repealed in 1902.
But, once Congress realized they could get away with that tax, it was subsequently reinstated and repealed several times, notably for World War I and then reinstated again to combat deficit spending during the Depression.
In fact, after it was reinstated as part of the Revenue Bill of 1932 it was reauthorized a whopping 29 times.
The telephone tax met a partial repeal… in 2006.
But is it really such a big deal?
I mean let’s face it; a tax of one cent for a 15-cent telephone call starts at a rate of 7%… and decreases as the cost rises. It’s only a 1% tax when the call costs $1.00. 7% is less than the sales tax in states like California, New York, and Illinois.
But while the telephone tax was never much of a hassle, it still represents an important principle. Like any temporary government measure, it didn’t stay so cheap…
By the time it was partially repealed in 2006 (mostly on long-distance calls), the tax burden had drastically increased. Instead of a 7% tax (or less), the rate had more than doubled.
“This is a good first step in alleviating consumers’ telephone tax burden, which currently accounts for more than 18% of the average bill,” stated Verizon vice president Tom Tauke at the time.
In fact, the excise tax on local calls still stands. But it’s not one cent, it’s a 3% burden.
And today it brings in over $5 billion dollars to Uncle Sam’s coffers.
So, remember the Maine. And the telephone tax, even if it’s just a tiny little line item as indecipherable as anything else on your phone bill.
You Can’t “Stick It to the Rich” Without Getting Stuck Yourself
But the telephone tax has another feature…
In 1898, a home telephone was a luxury only a few homes could afford. Even by the 1940s, nearly half a century later, many homes were connected via party lines.
But, from 1960 until 2006, a home telephone was available in nearly every home. The telephone tax, originally designed as a way to get some money out of the ultra-wealthy, was now bringing in small change from nearly every American.
And that’s the way taxes often work. They’re introduced and structured to get money out of whoever has the most. But over time, it expands gradually until all are caught in the net.
In other words, it starts at the top. But it never ends until it reaches as far down as possible.
The income tax is far more infamous for doing this than the telephone tax. After a constitutional amendment was passed in 1913, the original income tax rates topped out at a whopping 7%. And to hit that, you needed to earn more than $500,000 per year.
At the time, some joked that the tax was simply passed as a way of getting money out America’s ultra-wealthy industrialist, John D. Rockefeller.
And the highest tax rate would soar over tenfold in just a few years, to 75% during World War I. The highest rate would hit a whopping 94% in the final years of World War II.
Today, millions of Americans are caught up in paying an income tax, or at least having to spend time to file.
And the income tax is still grabbing more money at the top than the bottom. In 2021, the top 1% of income earners paid about 45.8% of all income taxes.
But somehow, that isn’t enough. Now, there’s a new proposal underway…
Realized Taxes on Unrealized Gains?
A policy proposal is being floated by Kamala Harris’s team. If passed, it would tax unrealized gains.
That simply means if you buy a stock that goes from $50 to $100, you could be taxed on the $50 gain. But the government would want you to pay that tax before you sell and realize the gain.
There are some logical flaws to this plan.
First, stocks fluctuate. The stock trading at $50 today might be at $40 at the end of the month. There’s no discussion about how taxpayers will handle unrealized losses.
Second, to pay for these taxes, the money will have to be raised. That could turn unrealized gains into real gains, which in turn could mean more taxes. And if enough people start selling shares to raise cash at once, a stock will go down.
Ultimately, a tax on unrealized gains is simply a form of a wealth tax – getting money off of what someone owes, rather than the income they produce.
Sure, the proponents of this plan say it won’t affect you. Just people who make more than $400,000 each year.
Or, in other words, the same wealthy folks who were hit with a 5% income tax bracket in 1913. How’s that working out today? Like any other tax, what starts with the ultra-wealthy will soon be expanded to get as many taxpayers as possible.
Look at it another way:
Your property tax is a wealth tax to some extent. That’s why your county property appraiser thinks your home is worth so much, and why even in a recession it’s hard to get that value lowered.
But unless you’re renting out a cottage in the backyard, your home doesn’t generate income. You have to work for income, pay taxes on that income, then pay down a mortgage. Yikes!
Imagine having to do that with every asset. There goes your incentive to invest, which in turn, makes it harder for companies to operate and fund expansion by issuing new shares.
It’s likely that these taxation trial balloons will end up bursting before economic reality. But you can never be too careful these days.
Unfortunately, investors have some limited options to avoid a wealth tax.
Assets like gold or collectibles like art may be harder to track down for unrealized gain purposes. Collectibles in particular, which don’t trade daily on an exchange, would be much harder to value.
And, of course, with the election coming up in November, the best course of action may be to inform your local candidates for office why proposals to tax unrealized gains could finally unleash a tax that crushes America’s prosperity engine once and for all. ~~ Andrew Packer, Grey Swan Investment Fraternit’
So it goes,
Addison Wiggin,
Grey Swan
P.S. If you are, in fact, expecting a coherent policy reveal at next week’s America’s Got No Political Talent debate on ABC on September 10th, don’t hold your breath. Party strategists on the right learned decades ago… policy doesn’t win elections.
The first in a list of History’s Channels top 7 landslide victories in presidential races was Johnson v. Goldwater in 1964.
Like today, the economy was “strong” in 1964 on the back of government spending leading up to Johnson’s Great Society. Civil rights dominated network news and national newspapers.
The History Channel explains what happened next:
The economy was strong in 1964 and the conflict in Vietnam was still in the back pages of the newspaper. The only thing that could have defeated Johnson in 1964 was a really compelling Republican opponent. Instead, the Republicans nominated Senator Barry Goldwater, a conservative hardliner.
“Extremism in the defense of liberty is no vice,” declared Goldwater at the Republican National Convention.
Goldwater didn’t address civil rights, the most important issue of the day, but lectured his audiences about the sanctity of private property, minimal government, and law and order.
“Goldwater’s campaign was almost designed to alienate voters,” says historian and author David Pietrusza.
Johnson thumped Goldwater in a landslide, winning 486 electoral votes to Goldwater’s 52, an electoral margin of victory of over 80%.
Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com
